Company Description: LQDT operates several leading online auction marketplaces for industrial surplus, salvage and retail assets. The company enables retailers like WalMart (WMT) and over 10,000 municipal governments to cost effectively liquidate obsolete or excess assets. LQDT’s reverse supply chain management online platform allows customers to realize greater value for their goods due to much greater buyer reach as compared to traditional onsite auctions which are typically attended by local buyers.
Investment Thesis: We believe the value of LQDT’s GovDeals business, plus the cash on its balance sheet, sums to a meaningfully greater value than the company’s current market capitalization leaving its retail and capital goods divisions as free options. GovDeals, which we view as the company’s anchoring asset, is a fabulous business. It has been consistently growing at a digit double pace for the past several years while increasing its margin by over 20%. GovDeals is an asset-light, eBay-like business that provides a platform for municipalities throughout North America to sell no longer needed municipal assets. GovDeals collects a commission of 10%, up from 8% a few years ago, and takes no responsibility for storing or shipping goods. GovDeals is the market leader, double the size of the next largest competitor, PublicX. LQDT recently introduced a commercial self-serve platform mirroring the GovDeals model.
Current Market Valuation:
Shares 32mm @ $5.60/sh = $179mm
Net cash $112mm
Enterprise Value $67mm
Adjusted EV Negative $83mm (after backing out $150mm for GovDeals)
Revenue $175mm
Free Cash Flow FY17 Negative $21mm; FY18 Negative $15mm
Key Considerations:
– We believe there are identifiable, non-existential, reasons for the company’s overall margin erosion of the past several years. For instance, the company was out-bid on its very profitable legacy DoD business choosing to walk away from an unprofitable business contract.
– Sophisticated online liquidation offering secure, authenticated high-quality service to customers is likely to continue to take share from onsite auctions and “Mom & Pop” liquidators.
– The company’s new integrated Liquidity One platform, is expected to be completed by year-end after several years of investment. Liquidity One spend will end and the cost of managing a single platform will materially drop from the costs to manage several platforms.
– Founder and CEO, Bill Angrick, owns 17% of outstanding common shares.
Insider Monkey’s Take: Liquidity Services, Inc. (NASDAQ:LQDT) hasn’t seen any insider purchases since the end of 2015. It seems like another value trap. I wouldn’t get involved with this stock unless an activist investor gets involved and forces a major restructuring and sale of assets.
Next we will discuss Roumell’s thesis in Medley Capital Corporation (NYSE:MCC). Medley Capital lost 71% over the last 4 years.
